The myth of a self-sustaining recovery
When it dawns on people that demand isn’t improving, the rebound has no legs and there’s no rescue party on the way, the market is in for trouble.
Hopes have been running high, both for a rebound in the economy and an enduring rally in the stock market. I believe that the economic recovery will not be self-sustaining, however, and what that means for the stock market (as well as the precious metals) is the subject of this week's "Contrarian Chronicles."
First off, as we've seen in these last two weeks, job losses continue to mount, even as folks point to employment as a lagging indicator. Yes, the tax cut helped. Yes, the rise in the stock market helped. Yes, until recently, lower rates and the refinancing boom helped. Housing also saw another spurt as last-gasp interest-rate timers jump on board.
But all of this now lies in the past. There is no self-sustaining process at work in the economy, in the face of the massive excess capacity that was spawned by the bubble, and the competitive nature of a post-cold-war NAFTA world. We continue to lose jobs to other countries. We are not able to export much that the world wants; witness the size of our trade deficit, at 5% of GDP.
We have piled up mounds of debt. Every year, it takes more debt to generate an incremental dollar of GDP, such that the national debt is now around $35 trillion, as compared to a $10 trillion economy. Consumers have leveraged up appreciating home values to live beyond their means. But they are so spent out that auto sales are flagging, despite zero-percent financing and rebates. There has been some incremental good news from certain tech companies. But that's because they are the companies that sell to companies that may be building up inventory. There are no real signs of an improvement in end demand.
Dawning of insight, downside for equities
In my view, the market will experience a dislocation when it dawns on folks that this "recovery" has no legs, that the Fed is not able to "bring it," and that no cavalry will rush in to fix the big problems we face. What remains to be seen is the process that will usher in this break in psychology.
I have no doubt, however, that this kind of environment is hostile to the S&P 500 sustaining itself at 30 times earnings of questionable caliber -- and hundreds of times earnings for Nasdaq's speculative playthings. Folks can continue to suspend disbelief in pursuit of fantasy. Or, they can choose to recognize what lies ahead and position themselves appropriately. (See my thoughts on precious metals, below.) The facts are there. The decision shouldn't be so hard. If you are a speculator who likes to play the game and feels capable, that's great. But anyone who can't shouldn't even try, or feel bad about not trying.
In a number of e-mails sent to me, folks have expressed agitation because they feel like they missed the rally. Its duration has caused them to question whether anything bad can happen, which of course is what always happens after a long rally. My comment is that you can't have it both ways. If you want to keep your risks down, you can't be upset that you didn't participate in a game of three-card monte (though the time to decide was last February/March, when the coming rally was obvious, as I noted in my Feb. 24 column, "3 Reasons to expect a war rally.") Occasionally, people win the lottery or at the track. But just because they do doesn't mean you should waste your money in that fashion, hoping to get lucky.
The race to debase abets metals' case
Meanwhile, the current environment only bolsters the case for a precious-metals investment, as it features the world's currency stewards, i.e., central bankers, trying to outprint their way to nirvana. In America, of course, money is printed at the drop of an electron. The Japanese, loath to see their currency lower than ours, do the same, as do the Chinese and (after a fashion) the Europeans. It's been a global quest for the keys to the functional equivalent of a financial perpetual motion machine. Obviously, if it were that simple, countries would have printed their way to prosperity long ago.
The only question is which currencies will get pummeled the hardest against the others, and how low the dollar eventually goes versus gold/silver? (Or, to put it a slightly different way, how high will the price of gold and silver go?) If the economic recovery is not self-sustaining, that will give folks yet another reason to want to buy gold, as they will fear what comes next.
On the flipside, if my view is wrong and the economy starts to get a head of steam, then you're asking for real problems on the interest-rate front. Stronger or rising rates would at some point impede a recovery, should one get started. Of course, there would be rising inflation to go with it, putting us in a period much like the 1970s, where we had a "stop/go" economy. Though I don't particularly expect that outcome, this type of stagflation would be bullish for metals, as well. For readers new to "The Contrarian Chronicles," I'd just like to repeat my own holdings in this arena: Long silver; long Pan American Silver, where I am a director and interested shareholder; long gold; and long Newmont Mining.
Politicos threaten a yuan-two punch
Finally, I would point out an ominous Associated Press story that passed on the tape last Tuesday: "Senators Threaten China with Tariffs" (thanks to my good buddy Lance Lewis for forwarding this to me). Writer Mary Dalrymple reported: "A group of Republican and Democratic senators said Tuesday they will push for tariffs on imports from China if the Chinese government does not take steps toward letting its currency float freely on world markets. 'It's a shot across the bow,' said Sen. Jim Bunning, R-Ky. Chinese goods would face a 27.5% American tariff, and China would lose its special trading status under the senators' bill, designed to prod China into changing its currency practices."
I don't know whether the senators' bill has a prayer in hell of passing. But this is exactly the kind of trouble that occurs after periods of bad economic leadership and massive misallocations of capital. It's not surprising that small-minded people would talk about erecting trade barriers.
History is replete with examples of that occurring. However, to pretend that it's not bearish is absurd. Maybe it deserves to be ignored because it's unlikely that anything such as this could happen. But given next year's election, I wouldn't put anything past the politicians, whose only real goal in life is to get elected.
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When it dawns on people that demand isn’t improving, the rebound has no legs and there’s no rescue party on the way, the market is in for trouble.
Hopes have been running high, both for a rebound in the economy and an enduring rally in the stock market. I believe that the economic recovery will not be self-sustaining, however, and what that means for the stock market (as well as the precious metals) is the subject of this week's "Contrarian Chronicles."
First off, as we've seen in these last two weeks, job losses continue to mount, even as folks point to employment as a lagging indicator. Yes, the tax cut helped. Yes, the rise in the stock market helped. Yes, until recently, lower rates and the refinancing boom helped. Housing also saw another spurt as last-gasp interest-rate timers jump on board.
But all of this now lies in the past. There is no self-sustaining process at work in the economy, in the face of the massive excess capacity that was spawned by the bubble, and the competitive nature of a post-cold-war NAFTA world. We continue to lose jobs to other countries. We are not able to export much that the world wants; witness the size of our trade deficit, at 5% of GDP.
We have piled up mounds of debt. Every year, it takes more debt to generate an incremental dollar of GDP, such that the national debt is now around $35 trillion, as compared to a $10 trillion economy. Consumers have leveraged up appreciating home values to live beyond their means. But they are so spent out that auto sales are flagging, despite zero-percent financing and rebates. There has been some incremental good news from certain tech companies. But that's because they are the companies that sell to companies that may be building up inventory. There are no real signs of an improvement in end demand.
Dawning of insight, downside for equities
In my view, the market will experience a dislocation when it dawns on folks that this "recovery" has no legs, that the Fed is not able to "bring it," and that no cavalry will rush in to fix the big problems we face. What remains to be seen is the process that will usher in this break in psychology.
I have no doubt, however, that this kind of environment is hostile to the S&P 500 sustaining itself at 30 times earnings of questionable caliber -- and hundreds of times earnings for Nasdaq's speculative playthings. Folks can continue to suspend disbelief in pursuit of fantasy. Or, they can choose to recognize what lies ahead and position themselves appropriately. (See my thoughts on precious metals, below.) The facts are there. The decision shouldn't be so hard. If you are a speculator who likes to play the game and feels capable, that's great. But anyone who can't shouldn't even try, or feel bad about not trying.
In a number of e-mails sent to me, folks have expressed agitation because they feel like they missed the rally. Its duration has caused them to question whether anything bad can happen, which of course is what always happens after a long rally. My comment is that you can't have it both ways. If you want to keep your risks down, you can't be upset that you didn't participate in a game of three-card monte (though the time to decide was last February/March, when the coming rally was obvious, as I noted in my Feb. 24 column, "3 Reasons to expect a war rally.") Occasionally, people win the lottery or at the track. But just because they do doesn't mean you should waste your money in that fashion, hoping to get lucky.
The race to debase abets metals' case
Meanwhile, the current environment only bolsters the case for a precious-metals investment, as it features the world's currency stewards, i.e., central bankers, trying to outprint their way to nirvana. In America, of course, money is printed at the drop of an electron. The Japanese, loath to see their currency lower than ours, do the same, as do the Chinese and (after a fashion) the Europeans. It's been a global quest for the keys to the functional equivalent of a financial perpetual motion machine. Obviously, if it were that simple, countries would have printed their way to prosperity long ago.
The only question is which currencies will get pummeled the hardest against the others, and how low the dollar eventually goes versus gold/silver? (Or, to put it a slightly different way, how high will the price of gold and silver go?) If the economic recovery is not self-sustaining, that will give folks yet another reason to want to buy gold, as they will fear what comes next.
On the flipside, if my view is wrong and the economy starts to get a head of steam, then you're asking for real problems on the interest-rate front. Stronger or rising rates would at some point impede a recovery, should one get started. Of course, there would be rising inflation to go with it, putting us in a period much like the 1970s, where we had a "stop/go" economy. Though I don't particularly expect that outcome, this type of stagflation would be bullish for metals, as well. For readers new to "The Contrarian Chronicles," I'd just like to repeat my own holdings in this arena: Long silver; long Pan American Silver, where I am a director and interested shareholder; long gold; and long Newmont Mining.
Politicos threaten a yuan-two punch
Finally, I would point out an ominous Associated Press story that passed on the tape last Tuesday: "Senators Threaten China with Tariffs" (thanks to my good buddy Lance Lewis for forwarding this to me). Writer Mary Dalrymple reported: "A group of Republican and Democratic senators said Tuesday they will push for tariffs on imports from China if the Chinese government does not take steps toward letting its currency float freely on world markets. 'It's a shot across the bow,' said Sen. Jim Bunning, R-Ky. Chinese goods would face a 27.5% American tariff, and China would lose its special trading status under the senators' bill, designed to prod China into changing its currency practices."
I don't know whether the senators' bill has a prayer in hell of passing. But this is exactly the kind of trouble that occurs after periods of bad economic leadership and massive misallocations of capital. It's not surprising that small-minded people would talk about erecting trade barriers.
History is replete with examples of that occurring. However, to pretend that it's not bearish is absurd. Maybe it deserves to be ignored because it's unlikely that anything such as this could happen. But given next year's election, I wouldn't put anything past the politicians, whose only real goal in life is to get elected.
